Not waiting for Trump, Fed hints at March rate increase

The Federal Reserve has raised interest rates only twice in the last decade, but recent remarks from Fed chairman Janet Yellen and some of her colleagues have convinced economists and the financial markets that an increase is likely to come next week.

The Federal Reserve has raised interest rates only twice in the last decade, but recent remarks from Fed chairman Janet Yellen and some of her colleagues have convinced economists and the financial markets that an increase is likely to come next week.

"A rate hike isn’t just baked into the cake, the cake is practically decorated and ready to have the candles lit," Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management in Menomonee Falls, Wis., told Reuters after Yellen strongly suggested in remarks Friday to the Executives Club of Chicago that the central bank will act at its March 14-15 meeting.

"At our meeting later this month, the committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate," Yellen told her Chicago audience.

Interestingly, Yellen also said the Fed is responding to information in current economic data and not the plans President Donald Trump says he has to promote growth.

"At this point there is a great deal of uncertainty about just what policy changes will be put into effect. ... We should be patient to see what happens," she said.

Earlier Friday, Reuters reported that Fed vice chairman Stanley Fischer said Fed policy-makers who recently signaled they would support an interest-rate increase were acknowledging growing public confidence and demand in the economy and stock market since the November election.

"What my colleagues have been saying is correct," Fischer said. "If you look at what's been happening to the economy since November 8 ... and to the asset markets, and if you take into account the operation of what people of my age call 'animal spirits' ... you will realize that there has been a substantial wealth effect in this economy.”

Yet even as consumer-confidence barometers continue to signal an upbeat 2017, wrap-up data of other kinds for 2016 show how much room there is for growth.

The Conference Board’s Consumer Confidence Index hit a 15-year high of 114.8 in February, as the percentage of consumers who told the survey that jobs are hard to get dropped to 20 percent, an eight-year low.

Often the second estimate of the nation’s gross domestic product reveals progress not apparent in the first reading, but that was not the case for the fourth quarter last year.

The Commerce Department’s initial estimate that growth occurred at an annual rate of 1.9 percent was not revised upward when the final estimate was released last week, despite strong consumer spending during the period. Business and government investment were revised downward.

Nonetheless, Paul Ashworth, chief U.S. economist at Capital Economics, told the Associated Press that the second half of last year was significantly better than the first half and that the results of business and consumer surveys were encouraging.

"The marked improvement in the survey evidence recently suggests that growth will continue at a decent pace in the first half of this year," Ashworth said.

He is predicting GDP growth of 2.5 percent in the first quarter.

The Commerce Department said last week that orders for durable goods rose 1.8 percent in January, rebounding from an 0.8 percent decrease in December, but a look inside the numbers shows the improvement was not broad-based. Its strength was in demand for commercial and military aircraft.

Excluding the transportation category, orders slipped 0.2 percent, and that was the weakest result since last June.

MarketWatch noted that although Trump has vowed to cut taxes and regulations and do other things that would help companies thrive, uncertainty about what Washington actually will do could slow investment for now.

Consumer spending slowed in January, although personal income rose, but the most significant development at the consumer level was that inflation had its largest monthly increase in four years.

Consumer spending rose 0.2 percent for the month after an 0.4 percent advance in December; personal income rose 0.4 percent after an 0.3 percent gain the previous month.

Auto sales fell 1.1 percent in February to 1.33 million vehicles from the same month last year, Autodata reported.

The Detroit News said consumers continue to favor trucks and SUVs over cars and noted that although sales to date this year remain at a near-record pace, some analysts see trouble ahead as automakers offer bigger incentives to move unsold vehicles.

Truck and SUV sales drove February sales increases for automakers that included General Motors, American Honda Motor Co. and Nissan North America.

"A weak start to the year for consumers suggests a downside risk to first-quarter growth prospects, though it likely won't quell recent chatter about a March Fed rate hike," Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, told Reuters.

Reuters also said that in January the Personal Consumption Expenditures Price Index increased 0.4 percent — representing its biggest gain since February of 2013 — after rising 0.2 percent in December.

Excluding food and energy, the so-called core PCE price index rose 0.3 percent in January. That was the biggest increase since January 2012 and it followed a 0.1 percent gain in December.

The core PCE price index increased 1.7 percent year-on-year after a similar gain in December. The core PCE is the Federal Reserve’s preferred inflation measure.

Although it is still below the central bank's 2 percent target, inflation is in the upper end of the range that Fed officials in December estimated would be reached this year.

If the Fed does raise rates at its mid-month meeting, it could cite the inflation data as a prime reason.